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The state of the penny market

The penny stock market has been on a tear lately and there is no shortage of liquidity out there. Recently we’ve seen huge runs of 100%+ in stocks like HBRM, KMAG, MSLP, ATRN, NEOM, SNPK, SEFE, TFER, STVF, ECOS, SNDY, GDSM, and many more. These runs have lasted multiple days, if not weeks, and some are still going. The question on everybody’s mind though is how long will the penny market remain so hot and what can signal that it is slowing down?

Contrary to popular belief, there is a reason that the penny market goes through hot and cold stretches, it’s all about the broader market. If you don’t think that the broader market (i.e. the Dow Jones, S&P500, & NASDAQ) affects the current state of the penny market then you haven’t been trading penny stocks for very long, or you just don’t do a good job of paying attention to trends. You see, contrary to popular belief, the people that fuel the liquidity in penny stocks are the retail traders with big time portfolios.

When the broader market is doing well that means many retail trader’s big board portfolio’s are doing well. You think someone with 6 figures in his/her portfolio is all in penny stocks? No, they’re making their money off of the uptrends in AAPL, JPM, LULU, YUM, HD, and other sector specific stocks. When they see their portfolio’s going up and they get some extra cash lying around they figure, heck I’ll go mess around with some penny stocks and see what looks good.

How do we know this? For a number of reasons actually. If tons of people with portfolio sizes of $500-$5,000 all start playing penny stocks at the same time, the liquidity won’t be as good as if tons of people with portfolio sizes of $25,000-$100,000+ start playing penny stocks at the same time. And if you pay attention to the liquidity in the penny market right now (some stocks are literally trading millions of $$’s per day) it’s obvious liquidity is great right now.

Then if you think about the times the penny market has slowed down over the last 12 months, the point becomes even more clear. Liquidity in the penny market really dried up starting in July of 2011 and remained pretty bad until October. During that time the S&P500 was busy declining 20%, so it’s no coincidence the penny market had slowed down. If those “big fish” retail traders who play penny stocks are seeing their big board portfolio go down, they’re naturally going to be more cautious, which means no penny stocks.

Furthermore, examine the activity of awesomepennystocks.com for a moment. They are by far the most well known promoters in the business and generate the most liquidity in their picks (be it by legal means or not, that’s not for us to say). You know what they did when the market slowed down during that period in 2011? They didn’t announce any new picks! Instead they featured POTG for months on end, recycling it to their members many times.

Why did they do that? Because they knew that the timing wasn’t right for a new pick. When did they finally release a new pick? In November, once the market had clearly stabilized and had begun a new uptrend. Since they’ve followed it up with other picks like NSRS & SNPK because they knew that the market was doing well so it was a good time strike while the iron is hot so to say. That brings us to our first sign to watch for that the penny market is slowing down.

When big time promoters like awesomepennystocks.com go quiet, take it as a cue that they don’t think the environment for promotion’s is very good. The only reason you don’t think the environment for promotions is very good is if you don’t think there will be ample liquidity in the stock you’re going to promote. So if after SNPK APS goes rogue for a couple week(s) and doesn’t send an email hyping up subscribers for their next pick (much like they went rogue after POTG), then tread carefully.

The next sign is if you start seeing penny stocks not reacting to what you believe is “good news.” Right now we’re seeing stocks run simply by announcing they have an announcement coming up (HBRM anyone) and for seemingly no reason (how you doing MSLP?). So if news comes out on a penny stock and volume & a run up don’t follow suit, that’s a sign the penny market may be losing steam.

Furthermore watch to see the “quality” of the runs these penny stocks are making when they do run. Are they running for a few hours? A few days? A few weeks? Right now penny stocks are making quality runs of at least a week long it seems. So if all the sudden penny stocks are only able to run for a day or 2, that’s yet another sign that a slowdown in the penny market might be coming up.

Lastly, and most importantly in our opinion, pay attention to the broader indexes like the S&P500. If they start breaking key support levels that won’t be good for penny stocks for reasons we have cited in this piece. Right now, SPX seems to be consolidating and it is still near 4 year highs, so that’s a positive. However, if the market starts to experience the 1-2% down days that were so frequent in July & August of 2011 then you definitely want to be careful.

When things are going well it’s easy to not think about what could potentially go bad, that’s why we’re here. We want all of our readers to be prepared and know what to look for so that way you’re portfolio doesn’t take a hit. We know how hard starting with $500-$1,000 and trying to grind your way higher can be and if you jump in when the market isn’t hot, it could set you back for a while. Everyone knows the saying, “pay attention to your surroundings,” right? Well we’ve outlined what you’re surroundings are so make sure you’re paying close attention, otherwise you could end up getting jumped in a dark alley.

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